Law Report: Third party can sue on contract: Darlington Borough Council v Wiltshier Northern Ltd - Court of Appeal (Lord Justice Dillon, Lord Justice Steyn and Lord Justice Waite), 28 June 1994

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A third party to a building contract, where it was the parties' intention that the contract was for the benefit of the third party, who was assigned the contracting party's rights against the building contractor, is able to sue the building contractor for substantial damages for defects in the building work.

The Court of Appeal allowed an appeal by the council from Judge Newey QC's order on a preliminary issue, on 13 October 1993, that the council did not have a valid claim against Wiltshier for damages other than nominal damages for breach of contract.

The council wished to build a new recreational centre and to avoid financial constraints for the requisite borrowing. Morgan Grenfell (Local Authority Services) Ltd entered into building contracts for the construction of the centre with Wiltshier for the benefit of the council. Collaterally to the building contracts, a covenant agreement recorded that Morgan Grenfell, as employer, would pay Wiltshier and the council would reimburse Morgan Grenfell. Morgan Grenfell assigned to the council all rights it had against Wiltshier.

The council claimed that there were serious defects in the centre due to bad workmanship or other breaches by Wiltshier and that expenses of pounds 2m would be incurred to remedy the defects. The council obtained a deed of assignment from Morgan Grenfell of all rights and causes of actions which Morgan Grenfell might have.

The judge decided that Morgan Grenfell, having no proprietary interest in the centre and no obligation to the council for the quality of Wiltshier's workmanship, had suffered no damage or loss from the defects, and could transfer no claim for substantial damages to the council, which was precluded by the privity of contract rule from claiming the damages it suffered.

Stephen Furst QC and Alexander Nissen (Pannone & Partners) for the council; John Blackburn QC and Howard Palmer (Druces & Attlee) for Wiltshier.

LORD JUSTICE DILLON said that it was common ground between the parties that the council as assignees of Morgan Grenfell could not recover any damages from Wiltshier beyond those which Morgan Grenfell could have recovered from Wiltshier if there had been no assignment. The general principle for the assessment of damages for breach of contract was compensatory.

It remained the law, although much criticised, that a third party could not sue for damages on a contract to which he was not a party. The general position was that if a plaintiff contracted with a defendant for the defendant to make a payment or confer some other benefit on a third party who was not a party to the contract, the plaintiff could not recover substantial damages from the defendant for breach of that obligation on the part of the defendant: Woodar Investment Development Ltd v Wimpey Construction UK Ltd (1980) 1 WLR 277. The plaintiff could, prima facie, only recover for his own loss.

One exception to the general principles was where the plaintiff made the contract as agent or trustee for the third party and was enforcing the rights of a beneficiary, there being a fiduciary relationship. A further exception, the rule in Dunlop v Lambert (1839) 6 Cl & F 600, was applied by the House of Lords in St Martin's Property Corp Ltd v Sir Robert McAlpine Ltd (1994) AC 85 where the rule provided 'a remedy where no other would be available to a person sustaining loss which under a rational legal system ought to be compensated by the person who caused it'.

It was obvious to Wiltshier that the centre was being constructed for the benefit of the council on the council's land. The rule in Dunlop v Lambert, as recognised in a building contract context in the St Martin's Property Corp Ltd case, would be applied and the appeal allowed. In addition, Morgan Grenfell could have recovered from Wiltshier the losses of the council to whom it stood, in that respect, in a fiduciary relationship.

The council, as assignee, had a valid claim against Wiltshier for more than nominal damages for breach of contract and the damages should be assessed on the normal basis as if the council had been the employer under the building contracts.

LORD JUSTICE STEYN, agreeing, said there was no doctrinal, logical or policy reason why the law should deny effectiveness to a contract for the benefit of a third party where that was the expressed intention of the parties. The genesis of the privity rule was suspect but the rule persisted in all its artificial technicality. The established doctrine deprived the council of a remedy and allowed the contract breaker to go scot-free.

The present case was covered by an exception, recognised in the St Martin's Property Corp Ltd case, to the general rule that a plaintiff could only recover damages for his own loss.